Don’t Get Fooled by Lumber Pricing
The huge runup in lumber pricing in the spring has gotten the attention of homeowners, builders, and subcontractors, and most equate these cost increases as the main cost of housing. While it is important, lumber pricing is not the main driver of home prices. Don’t be fooled by assuming that new home prices are coming down anytime soon.
Since April 2005, RoMac Building Supply has released to builders and consumers, free of charge, a Whole House Commodity Index which charts the delivered wholesale price of structural building materials to construct a 2,000 square foot home in Central Florida. The Index does not include décor items, HVAC, electrical, plumbing or labor, but it accounts for everything else inside and out to build this home. By doing wholesale pricing it gives the builder a real view of what pricing will be over the next 30 to 45 days.
The mid-May Index was very surprising and eye opening. Lumber prices from April to May dropped on average around 20 percent, but the Index actually rose 1.4 percent to another record high. How could that be? The increases in foundation mesh, drywall, roofing, doors, windows, and sheathings like OSB and CDX plywood offset the lumber price increases. The building material supply chain is in shambles as demand is outpacing production, and anything made with metal is in short supply and rising monthly in pricing. Three years of trade wars and surging demand in the huge, populated areas like China and India have created a situation where America is no longer the world’s premier trading partner. Plus, sea freight rates have double and tripled in price with significant lag times.
To better gauge the dramatic increase of the price of a home since this pandemic began last year, consider these two numbers - since June 2020, one year ago, this Index has increased 63.9 percent and since January 1st of this year, the increase is 25.1 percent. Now consider, land prices are soaring daily as builders and consumers look for dirt to build on, and labor costs are up dramatically as the country has an aging workforce and not enough immigration. There is a huge shortage of skilled labor. On top of this, there are shortages in electrical wire and plumbing parts with much higher pricing crippling those scopes of work. In short, it is a mess.
The other factor that must be considered is that the drop in lumber pricing is primarily due to a slowing in demand to Big Box retailers as much of the country goes on vacation after enduring 15 months of a pandemic, but there is a Tsunami of housing starts planned for the third and fourth quarter this year. A recent Wall Street Journal article using National Realtor Association Data suggests the country needs 5.5 million new homes which would equate to 2.4 million housing starts for 5 years. The country over the last decade has not built enough homes by historical levels and the housing market over the last decade has averaged less than 1.4 million homes per year.
This housing demand, if true, will overwhelm the supply chain for some time as companies have limited abilities to expand production and get raw materials. Expect lumber prices to be volatile and rebound, and do not expect pricing at pre-pandemic levels.
Don’t be fooled by a drop in lumber pricing. All the other costs including government regulations and permitting costs are soaring. With most locations in Florida having less than a month supply of housing inventory, expect availability to remain tight and prices to increase.
Here is the caveat which could make things even worse- a bad hurricane season. In next week’s column, I will detail the huge problems associated if the country is struck by a major hurricane.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and he is also the host of the “Around the House” Show which can be seen at AroundtheHouse.TV.